The undeclared recession is doing its rounds and foreign real estate investment in California is not exempt from it.
Since the second half of 2021, the US dollar has dominated other financial markets. A strong dollar offers a better exchange rate for the United States, which sounds good for American tourists visiting other countries. However, on an economic scale, it causes problems for states like California, a major player in the global economy, as noted by the New York Times.
Globally, commodity prices fall when the dollar appreciates against other currencies, according to Brookings Institution. In other words, when the United States goes high, the other world economies go low.
The negative exchange rate for investors from other countries leads to an immediate reduction in purchasing power. Just as the 2022 mortgage interest rate hikes caused buyer’s purchasing power fall, exchange-dependent international buyers are now paying more for a home at the same price.
The result is that buyers of all types are unwilling – or unable – to pay the same high prices as earlier this year.
California real estate prices have already started to recede due to peaks mortgage interest rate and a decrease in buyers’ willingness to jump into a spiraling market. In addition to these market pressures, regions and industries that rely heavily on foreign investment are also experiencing declining demand.
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The ghost of Chinese ownership
Of the many international buyers who currently own California property, the largest number of investors come from China.
Consider a Chinese buyer who purchased a home in California in January 2021.
At the time, the Chinese Yuan Renminbi (¥) was trading at 6.48 Yuan per US dollar. The purchase price was $1,000,000, or ¥6,480,000.
In October 2022, the Yuan is trading at ¥7.22 to $1. In other words, the US dollar has become much more expensive to buy using the Chinese yuan. However, the buyer who bought in January 2021 and sells today has essentially seen their investment drop from ¥6,480,000 to ¥7,220,000. This is an increase of ¥740,000 or $102,493 due to the strengthening dollar alone.
In other words, a Chinese investor is much more likely to try to sale in this environment of higher exchange rates rather than hold on their investment, especially with today’s price drop – and they are very unlikely to buy under these oppressive exchange rate conditions.
In 2021, Chinese investment has begun to slow both here and abroad, and the decline doesn’t seem to be stopping.
Instead, China and others are pulling out of California assets in hopes of gaining liquidity. By doing so, international home buyers provide themselves with a cushion while waiting for negative exchange rates. This allows international buyers to recover from the loss of the strong dollar as they once again prepare to compete for California properties.
International buyers will eventually return around 2025-2026 with other investors. In the meantime, this will be just one of many blows to real estate over the next two to three years.
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